11th December 2010 DipHRM12 / DipCore12B Nervin Sankara Pillai

Table of Contents

1. Introduction

1.1 Findings of the article

1.2 Goal of this essay

2. Gross Domestic Product (GDP)

2.1 Defining GDP

2.2 GDP and Consumer Spending

2.3 Calculating GDP

3. Demand and Supply

3.1 Defining Demand

3.2 Defining Supply

3.3 Market Equilibrium

4. Food for Thought – Inflation

4.1 Effects of Inflation

4.2 Governments’ Role in Curbing Inflation

5. Conclusion

6. Appendixes

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 11th December 2010 DipHRM12 / DipCore12B Nervin Sankara Pillai

Affluent Singaporeans’ spending on luxury items surges

1. Introduction

On October 15th 2010, online news portal “Singapore Business Review”

published an article featuring an increasing trend of affluent Singaporeans spending
on luxury goods. The article was derived from a regional study on 11 Asia Pacific
nations, measuring the spending powers of young adults, particularly in the area of
luxury goods.

1.1 Findings of the article

The results of this study raised a few eyebrows, to say the least. Singaporean
consumers proved to be impressive spenders, with most of their money used in
purchasing high-end products. The startling finding in this study was that this trend
was already present in 2009, when the global economic crisis erupted, and
continued to rise in 2010 as most nations pulled out of recession.

1.2 Goal of this essay

By inferring from the contents of the article, this essay will further assess the
following 2 economic issues –

 Gross Domestic Product (GDP)

 Demand and Supply

We will look at how a nation’s GDP is measured, and how consumer spending has
an effect on the rise and fall of GDP. We will also look at the means by which the law
of demand and supply plays into consumer spending, impacting the price of goods
and consumer’s purchasing decisions.

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2. Gross Domestic Product (GDP)

In the given article, it is stated that Singapore’s impressive GDP rebound was
a driving factor in influencing Singaporeans’ affluent spending. What exactly is GDP?
How does it affect economic growth and alter consumer confidence?

2.1 Defining GDP

GDP can be defined as an economic indicator that gauges the market

value of all final products and services manufactured in a country in a given period of
time (usually a fiscal year). Countries across the globe strive to increase their own
GDP, as a high GDP count symbolizes the country’s symbolizes prosperity and great
standards of living. Gans, King & Mankiw (2005, p.613) highlight that it is important
to note that it is GDP per Capita, and not GDP alone that measures consumers’
purchasing powers.

2.2 GDP and Consumer Spending

The article mentions that in 2010, consumer spending increased drastically in

Singapore as the country pulled out of recession and saw its national GDP rise. “This
is fairly unsurprising, as rising GDP indicates rising income, lower unemployment
rates and general progression of the country” (cited from
http://www.quickmba.com/econ/macro/gdp on December 3rd 2010),

However, let’s analyse the fact the consumers were still spending affluently in
2009, right in the midst of recession. Could lavish consumer spending actually be a
factor which pulled Singapore out of recession? The answer is yes.

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2.3 Calculating GDP

Gans, King & Mankiw (2005, p.582) state that, GDP is divided into four
components of expenditure; Consumption (C), Investments (I), Government
Purchases (G) and Net Exports (NX). Therefore we calculate GDP as

GDP = C + I + G + NX

The above formula is the Expenditure Approach to calculating a country’s

GDP. The “consumption” component is inclusive of the expenditure for goods and
services, in reference to our article. Besides just contributing in raising Singapore’s
GDP, affluent spending also triggers another economic factor – The law of demand
and supply.

3. Demand and Supply

With Singaporeans spending on luxury goods, manufacturers have to meet

the consumers’ demands with a constant supply of products. In such a scenario, who
has the ball in their court? The consumers, who ensure revenue for the
manufacturers even in times of recession? Or is it the manufacturers, who have the
liberty to name their prices to the consumers who desire these products?

3.1 Defining Demand

Stock & Watson (2002, p.236) define demand as the relationship between the
quantity of a product that consumers will purchase, and the price charged for that
product.

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 11th December 2010 DipHRM12 / DipCore12B Nervin Sankara Pillai

Diagram Extracted from www.monash.edu.au

The above graph, known as a demand curve, illustrates this relationship

clearly. The downward sloping line indicates that higher prices result in lower
demand (P1 & Q1) and lower prices result in higher demand (P3 & Q3).

Therefore as consumers, affluent Singaporeans would ideally spend more on

if their desired items were priced lower. This however, would not be benefitting to the
manufacturer, who seeks to earn maximum revenue from his supply.

3.2 Defining Supply

Inverse to demand, Stock & Watson (2002, p.241) define supply as the
relationship between the quantity of a product that manufacturers will offer for sale
and the price charged for that product.

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Diagram Extracted from www.monash.edu.au

The above graph, known as a supply curve, is upward sloping and represents
the amount of products that manufacturers are willing to sell, at different price levels.
For example, if the same manufacturer produced wallets (P1 & Q1) and belts (P2 &
Q2), chances are, he would supply more belts that wallets to be sold. This is
because the demand and hence, the price of belts is greater than that of wallets.

3.3 Market Equilibrium

With consumers looking to buy at the lowest price and manufacturers looking
to sell at the highest price, Jackson (2009, p. 150) agrees that “a form of balance has
to be established to ensure market growth”. In economics, this balance is known as
Market Equilibrium.

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Diagram Extracted from www.monash.edu.au

To measure the point of Market Equilibrium, both the demand and supply
curves are drawn on out the same graph. The point where both line intersects,
indicates the point where quantity of both demand and supply are equal, explains
Jackson (2009, p. 132). To ensure that they won’t lose their affluent consumers,
manufacturers of luxury goods have to ensure that their prices are in sync to the
current market conditions.

4. Food for thought - Inflation

Just before wrapping up this paper, let’s ponder over another economic
situation. Though it was not mentioned in the article itself, what would have
happened in the event that the number of affluent Singaporean shoppers rises to a
point where manufacturers are unable to keep up their purchasing demands? The
result of this would be inflation.

4.1 Effects of Inflation

When inflation occurs in an economy, the worth of money and monetary

commodities such as loans are gradually eroded. An item than may have caused

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$10 in the past would now cost $20. This effect triggers a string of other chain
effects. Among this is Cost Pull Inflation.

When consumers can no longer afford to pay for their luxury goods, they
would seek out immediate wage increase in order to satiate their demands. But by
doing so, the value of money is further eroded and plunges the economy further into
inflation. This effect would repeat itself in a vicious cycle, leading to other social
problems like unemployment, until there is intervention from the government.

4.2 Government’s role in curbing inflation

Governments would seek to curb inflation through tax reforms via the central
bank. Eichengreen (2008) observes that in Singapore, the Monetary Authority of
Singapore (MAS) would step in to raise tax and interest rates across all financial
institutions. This move is to contain unnecessary borrowing and spending by
households and companies.

In addition, the MAS would propose fiscal policies which will see the
Government reduce its spending and budget allocation. These measures, while
curbing expenditure, also appreciates or raises the value of currency gradually back
to its normal rate.

5. Conclusion

After understanding this theory, it is no wonder why even luxury goods are
sold at a cheaper cost during a recession. Manufacturers would have few options on
increasing their revenue and clearing their existing supplies. Hence, price lowering
would be their only, viable option to earn revenue.

As the recession cedes and GDP picks up, the price of these goods generally
rise back to their initial rates as demands increase. This theory therefore explains the
reason why affluent Singaporean shoppers were able to maintain their shopping
spree, even in the wake of global recessions; they were probably paying lesser!

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6. Appendixes

Gans, J., King, S. & Mankiw, G. 2005, Principles of Microeconomics,

Thomson Learning Australia, Victoria

Stock, J. & Watson, M. 2002, Introduction to Econometrics,

Addison Wesley, Massachusetts

Jackson, T. 2009, Prosperity without growth: Economics for a finite planet,

Earthscan Publications, London

Eichengreen, B. 2008, China, Asia and the new world economy,

Oxford University Press, Kuala Lumpur

Gross Domestic Product, 2010 (http://www.quickmba.com/econ/macro/gdp/),

Viewed on 3rd December 2010.

Integrating graphs and diagrams in written work, 2010

(http://www.monash.edu.au/lls/llonline/writing/business-
economics/economics/2.4.2.xml), Viewed on 3rd December 2010

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